Collective redundancies: Personal criminal liability

Background

By way of reminder, where an employer proposes to dismiss 20 or more employees at one establishment within a period of 90 days, it has a legal obligation to notify the Secretary of State of that proposal via an HR1 form. In the case of 20 - 99 proposed redundancies, the form must be submitted at least 30 days before the first dismissal takes effect and in the case of 100 or more proposed redundancies it must be submitted at least 45 days before the first dismissal takes effect. A failure to comply with the obligation is a criminal offence. An employer may be faced with criminal liability but any “director, manager, secretary or similar officer of the body corporate, or any person purporting to act in any such capacity” may also be personally prosecuted where the offence is proved to have been committed with their consent or connivance, or to be attributable to their neglect.

The legislation affords a defence to the employer for failure to comply with its duties where “there are special circumstances which render it not reasonably practicable” to comply with the notification and consultation obligations, provided the employer takes “all such steps towards compliance …as are reasonably practicable in those circumstances”. It is important to note that the insolvency of a company will not necessarily be a "special circumstance" for the purposes of the legislation.

With the above in mind one of the key questions in this case was whether an administrator falls into the group of people who can be personally prosecuted.

Facts

This case concerned the administration of USC, a wholly owned subsidiary of Sports Direct.com Limited. A large number of redundancies were made in Glasgow when a USC warehouse was closed. An Employment Tribunal awarded the maximum 90 day protective award per employee for a failure to inform and consult regarding the redundancies. The Insolvency Service got in touch with the joint Administrators to ask whether an HR1 form had been sent, following which it was emailed to the Insolvency Service.

Criminal charges were issued against Mr Palmer, one of the joint Administrators, and Mr Forsey one of USC’s directors, regarding USC’s failure to submit the HR1 in accordance with the legislation.

Mr Palmer argued that the Magistrates’ Court erred in law in concluding that as an administrator he was a director, manager, secretary or similar officer of the company and submitted a judicial review application to the High Court.

Decision

The High Court dismissed the application for judicial review. It held that administrators can be personally liable if the offence was committed with their consent or connivance or if it was attributable to their neglect. From appointment an administrator has control of the company and the court held that “Parliament must have intended that in principle anyone with responsibility for the day to day management and control of the corporate entity should be capable of being fixed with personal liability for the employer’s failure to give the statutory notices which they had brought about.”

The criminal proceedings against Mr Palmer and Mr Forsey will now go ahead and we will wait to see whether this is the first successful prosecution of company directors or officers (including an insolvency practitioner appointed over a company's insolvent estate) for this offence.

Key takeaways

This Judgment acts as an important reminder for employers, directors, managers, secretaries or similar officers, of the importance of filing the HR1 form as it is one of the rare instances where a failure to comply with employment related legislation can result in criminal liability. There is no penalty for submitting an HR1 in relation to redundancies which ultimately do not occur and this is favourable to the alternative which can result in personal prosecution.

This decision also places administrators in a tricky position where they may find themselves conflicted. They have a statutory duty as an administrator to rescue the company as a going concern and to act for the benefit of all the creditors. It may be that complying with their duty to submit the HR1 form (i.e. giving at least 30 days’ advance notice of proposed redundancies before a dismissal can take place) conflicts with their duty to act in the best interests of the creditors. The Court took these arguments into account but concluded that administrators can still be personally liable, holding "there may be cases in which an administrator might find himself in the unenviable position of either committing a criminal offence or (at least arguably) breaching his statutory duties.”

If you have any questions on the topic covered in this alert please contact our employment specialists, Kate Brearley and Leanne Raven or our insolvency experts Julian Cahn and Ian Benjamin.